La Trobe Business School

Month: March 2016

By Mark Morris

One of the more enduring and pithy songs that the late John Lennon composed during his years outside the public eye was the witty and jaunty ‘Nobody told me (there’d be days like these)’ which lyrically kicks off with the ironic observation that ‘Everybody’s talking and no-one says a word’.

I am sure John would be plunged into despair that I invoke this lyric when discussing contemporary tax reform in Australia but it does resonate with me somewhat given the Turnbull Government appears to have retreated from major systemic tax reform whilst the Opposition is largely focusing on tinkering with reform to superannuation concessions, negative gearing and interest deductions claimed by multinationals.

However, neither party appears to be currently proposing any new substantial measures to simplify the Australian income tax regime for small business or to provide that sector with any meaningful incentives during a period of real economic malaise.

Accordingly, whilst the Government often refers to small business as being the engine room of the economy, and the Opposition proudly boasts on its website that it stands up for the middle class, neither party has currently proposed any fresh tax initiatives that either cut red tape or improve cash flow for small businesses.

In my view there are at least 4 tax policy ideas that could help revitalize the small business sector which should be considered in either the framing of the 2016 –17 Federal Budget or developing the small business taxation framework for the next elected government.

Whilst such reform proposals may not offer the systemic tax reform Australia desperately requires, they would nonetheless reduce the burgeoning compliance burden imposed on small business without triggering a major blow out to our seemingly entrenched Federal Budget Deficit.

These 4 initiatives can be summarized as follows:

1. Increase eligibility to be a small business entity

Under the existing tax law a small business entity is subject to a raft of concessions where that entity carries on a business and its ‘aggregated turnover’ is less than $2 million. Such concessions include, amongst others, accelerated tax depreciation relief and a lower company tax rate of 28.5% if the company is a small business entity.

As the $2 million threshold was effectively put in place from the 2007 tax year there is a strong case to argue that the threshold should be increased to at least $3 million to both reflect inflation over the intervening 9 years and to bring more entities within the small business entity framework.

The former Treasurer Mr. Hockey flagged that this was the next logical step when presenting to the Australian Chamber of Commerce and Industry’s Business Leader’s Summit on 17 August 2015 but noted that such an initiative was subject to Budgetary constraints. Following the appearance of the Cabinet Secretary Mr. Sinodinos on the ABC’s Insider’s program on 20 March 2016 it appears that the Government is also currently considering the merits of some type of company tax relief.

To the extent such an initiative is a cost to the Budget it could be funded by additional revenue raised by tightening superannuation tax breaks for high income earners as it is more imperative to grow the small business sector now rather than retain superannuation concessions for the wealth.

Such measures could include superannuation contributions being taxed as income in the hands of individuals at their marginal rates albeit subject to a 15% refundable tax offset rather than be taxed at a flat 15% rate.

Deloitte recently championed a variant of this proposal in its publication “Shedding light on the debate – Myth busting tax reform” which it suggested would generate a reform dividend of around $6 billion in the 2016-17 year.

Accordingly, if this change was made some corporate tax relief for small to medium sized companies appears achievable.

2. Redesign Division 7A

As any tax adviser servicing the SME market will tell you the most problematic and invidious set of provisions impacting small and medium-sized taxpayers are the provisions set out in ‘Division 7A’.

Essentially, Division 7A was introduced to automatically treat any payment, loan or debt forgiveness by a private company to a shareholder or an associate of a shareholder as an unfranked deemed dividend paid out of the company’s profits (assuming no stipulated exemptions were available).

Unfortunately these provisions have become inordinately complex over time following various tranches of technical amendments which have also brought trust distributions within the scope of these provisions.

The biggest problem area is the application of Division 7A where loans have been made by a private company to a shareholder or associate.

For example, the most common breach of Division 7A is where a private company makes a loan to an associated trust purely for business purposes but the loan to the trust is treated as an unfranked deemed dividend because it is either not in writing or the interest rate charged is below the annual benchmark interest rate. Prima facie this means that the amount of the loan may be regarded as a deemed dividend even though the borrower did not obtain any private benefit from the company which was the original underlying intention of Division 7A.

The Board of Taxation issued a comprehensive report to the Federal Government in November 2014 setting out how the Division 7A loan rules could be simplified, including proposing new criteria that would allow greater flexibility in terms of loan arrangements whilst providing sufficient rigour to crack down on disguised distributions of profits to shareholders and associates.

It also proposed that loans owed to private companies by associated trusts in the form of unpaid trust distributions could be taken outside the scope of Division 7A which would relieve such trusts from having to raid their working capital or sell assets to fund the payment of such distributions. The Board even set out measures to fund the impact of such a change as trusts electing this option would forego their entitlements to reduce any capital gain on the disposal of future assets (other than goodwill) under the 50% CGT Discount.

Regrettably the recommendations of this review were to be subsumed into the Federal Government’s White Paper on Tax Reform which has now been consigned to history even though Division 7A reform is still chronically required.

Implementing the Board’s measured recommendations would materially assist both business and their tax advisors in complying with the tax laws and markedly improve productivity.

3. Simplify the small business CGT concessions

If you ask anyone who advises on the small business CGT concessions they will invariably tell you that accessing them can often be like winning a lottery for taxpayers who can successfully navigate the myriad of different rules that must be met in in order to extinguish or reduce a capital gain on the sale of their business.
The most contentious aspect of the small business CGT concessions is the $6 million maximum net asset value test. Indeed, virtually all of the major cases litigated over the past year concern compliance with this test which is poorly understood by taxpayers and is highly subjective in nature. This test must be met if the entity cannot otherwise meet the $2 million aggregated turnover test.

Essentially, the $6 million asset test involves determining the market value of all CGT assets held by the taxpayer and any related connected entities and/or affiliates reduced by any related liabilities.

Compliance with the test is quite counterintuitive as you have to include CGT assets which are outside the scope of the CGT rules such as pre-CGT acquired assets, depreciating assets and trading stock.

But the worst problem with the test is determining the market value of CGT assets just before their sale as there are often disputes between the ATO and taxpayers regarding the valuation of assets at that time.

We have even had cases where the sale consideration on a sale of shares between arm’s length parties was held to not be the shares’ market value as that valuation but had to be discounted to reflect the fact that the shareholder selling the shares did not control the company. Try translating that uncertainty to a small business taxpayer, let alone apply it.

As an alternative the subjective $6 million net assets test could be dumped and replaced by a higher aggregated turnover test which is calculated according to objective and transparent criteria. For example, the law could be amended so that an entity could obtain full access to the concessions if its aggregated turnover was less than $3 million but only 50% of the concessions if its aggregated turnover was more than $3 million but less than $4 million.

Sure some asset rich income poor entities would lose out but this tapered test could be readily interpreted by taxpayers and lead to much less uncertainty and disputation.

4. Streamlining the taxation of trusts

As someone who was heavily involved in the review of the taxation of trusts for many years I now recognize that any reform of this area is strewn with challenges, and that the best option is in fact to try and make the existing system work better and remove a range of anomalies.

To give an example of a bugbear, trustees still need to make a resolution before year end as to which beneficiaries will receive a share of the trust’s distributable income (which will in turn determine the beneficiaries’ share of taxable income). Accordingly, trustees need to able to divvy out trust distributions on some basis even though the trust’s accounts are not finalized let alone their tax returns. This is an unsatisfactory state of affairs and still leads to a great deal of confusion in the marketplace as well as being an unduly hectic addition to year end. This could be alleviated if the Government legislated that such a resolution could be completed within 2 months of year end as was former long standing administrative practice.

Different rules also apply to fixed trusts (e.g. unit trusts) and non-fixed trusts (e.g. family discretionary trusts) throughout the tax laws but there is no common definition as to what those terms mean for the purposes of various provisions littered throughout the legislation.

For instance, there are different rules regarding the recoupment of trust losses for fixed and non-fixed trusts as non-fixed trusts are subject to much more stringent rules.

However, the ATO has opined in a Decision Impact Statement on Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 that there are very few trusts that are fixed trusts under the trust loss rules, and that they will be treated as non-fixed trusts in the absence of the Commissioner exercising a discretion to the contrary. In other words the demarcation between the legislative rules has now become blurred and you have to rely on the Commissioner to exercise a discretion to apply the more lenient trust loss rules applicable to fixed trusts.

Not surprisingly a leading mid-market practitioner recently likened his situation to being dumped in a quagmire as you often don’t know how to advise your client as to what they should do.

Finally, there is a lack of consistency between unit trusts and companies when it comes to being able to carry forward and utilize tax losses. Both entities are essentially subject to a continuity of majority ownership test. However, where that test is breached a company can rely on the same business test whereas a unit trust has no fallback equivalent test so that the tax losses are effectively lost when there is a change in majority beneficial ownership of a trust like a unit trust. There does not seem to be any sensible rationale for this distinction going forward especially given the prevalence of unit trusts trading as businesses.

Once again reform of this area has fallen off the radar now that the White Paper on tax reform has been dumped.

Nonetheless the plethora of unresolved issues concerning the taxation of trusts still need to be addressed and rectified.

Given the need to urgently simplify our tax system for small business it is disappointing that there is so much chatter about leadership, tax reform and a more agile economy without any real substantive tax policies for SMEs being advanced or sensibly debated.

As the late Mr. Lennon presciently observed everybody’s talking but no one is saying a word about the real issue.

The reality is that the current Government is correct in noting that Australia does not need any more tax reviews. There are plenty of good ideas out there already. What few leaders want to talk about is the cost of implementing much needed reform which will invariably result in losers as well as winners.

However, until we get that much needed leadership many of us frustrated with the current inertia on tax reform can justifiably mutter to ourselves ‘No-one told me there’d be days like these’.

On the evening of 21 March 2016, Professor Patrick Keyzer appeared on the ABC’s Four Corners, to comment on 22 year-old Hal Hunter’s case against Essendon Football Club. Hunter played at Essendon during the now notorious Essendon supplements scandal. Patrick Keyzer is a Professor of Law at La Trobe University, but is representing Hal Hunter in his private capacity as a barrister.

Hal Hunter played for Essendon for two years before being de-listed in 2013. After his parents’ attempts to get information from the club were ignored, Hal decided to seek pre-litigation disclosure from Essendon and the AFL. After eighteen months of delays Hal got his day in court in October last year. The Supreme Court ordered the AFL to produce over one hundred documents for Hal and his legal and medical team to consider. The Supreme Court did not order Essendon to produce any documents because, the day before the hearing, Essendon’s lawyer swore an affidavit that Essendon had told him that they had provided all of the relevant documents they had. Notwithstanding their representations to the Court, which they relied on successfully when they sought a costs order against Hunter in February, Essendon sent further documents to Hunter just last week. Keyzer was reported on 3AW Radio yesterday and advised that if Essendon did not agree to a reversal of the costs order that Hunter would have no choice but to return to Court and point out to the judge that the affidavit sworn by Essendon’s lawyer in October was no longer accurate.

“They’re treating it like an issue that will just go away,” Hal Hunter said on Four Corners, “but for me, if I’m not going to get the answers to the questions I’m asking, it’s never going to go away.”

Through the program, Essendon players were injected with unknown substances repeatedly, sometimes on off-site locations. When asked about the risks of these substances Dr Peter Brukner OAM, who is a specialist sports and exercise physician, media commentator, and Honorary Professor of Sports Medicine at La Trobe University, explains that the risk lies in the fact that they are unregistered:

“What people sometimes don’t realise is that the Essendon scandal doesn’t revolve around supplements, but actual unregistered drugs. This means that these drugs aren’t tested and long-term effects or harmful side-effects are largely unknown. To someone like Hal Hunter, the unknown nature of these drugs is understandably distressful, and Essendon should do anything within its power to provide this clarity to its players.”

LBS sports academic, Dr Emma Sherry, whose research focusses on sports and athlete welfare and sport and the community, is happy to see the narrative of the Essendon trial shift to the health of individual players.

“Often in instances of doping, the focus is on the fact that athletes were cheating, rather than the health risk any unregistered drugs may impose. But for these 34 players, their sense of control has been taken away from them, when it comes to their health. When they get sick in the future, they will never be certain whether this development is a long-term side-effect from this unregistered drug, or whether it would’ve happened regardless. Basically, they have been exposed to a human clinical trial, without giving their consent.”

Should young people aim for university graduation, or is it better to focus on other things in life? LBS Associate Professor Buly Cardak was featured on Radio National in a series of interviews to talk about how the disparity between well off students and disadvantaged students is reflected in graduation rates.

In the drawn out process leading to a decision as to whether Hal Hunter decides to sue the Essendon Football Club or the AFL or both (or neither), the Victorian Supreme Court made a formal costs order against Hunter in favour of Essendon in respect of an interlocutory matter. At this stage, the parties have been involved in just the one specific legal issue for nearly 18 months: that of pre-action discovery.

Hunter played with Essendon as a rookie for nearly two years until he was cut and de-listed (and departed Essendon and the AFL) in September 2013. During that period, he was allegedly involved in the now notorious controversy referred to as the ‘supplements program’.

The Court of Arbitration for Sport found 34 Essendon players guilty of using performance enhancing drugs as part of the supplements program. Hunter was not among them.

As a consequence of that same supplements program, Essendon Football Club pleaded guilty to significant workplace breaches and was fined $200,000.

Now Hunter is concerned about his health and wants to know what the consequences of the supplements program are to him. So Hunter and his lawyers want access to all the supplements program documents held by the AFL and Essendon in order to see if he has a case and, if so, whom he should sue. He is doing this by way of pre-action discovery.

Pre-action discovery, which may be granted at the discretion of the court where the ends of justice require, differs from ordinary discovery in litigation, which is an entitlement.

Lengthy and somewhat testy correspondence about the supplements program documents between the parties’ lawyers over a year or so culminated in an application by Hunter for a formal order for pre-action discovery heard by The Honourable Associate Justice Mukhtar in October last year. His Honour found that Essendon had by then handed over every document it had relating to the supplements program.

As a result, on Wednesday 10 February, Essendon applied for and was granted an order for its costs of that October hearing which will likely be of the order of tens of thousands of dollars Notably, however, Essendon will receive no costs for any of its work in the eighteen months leading up to the day before the hearing. The judge formed the view that the late provision of an affidavit by Essendon disqualified it from receiving all of its costs. .

Essendon has been quoted over the last few years as vowing to look after the players involved in the supplements saga. Obtaining an order for costs against one of them seems directly contradictory to this.

The discovery of only a handful of documents by Essendon indicates that record-keeping during the supplements scandal was not a high priority. Yet there are a substantial number of authorities that indicate that poor record-keeping is reflection of negligent practice. Furthermore, a clause in the tripartite contract between players, the AFL and AFL clubs imposes a duty on the AFL and clubs to advance the welfare of the player. It would be impossible to argue that this duty was fulfilled during the supplements scandal.

Essendon and the AFL should take steps to settle this matter, and the other cases that have emerged among the Essendon and former Essendon players caught up in the supplements scandal. In the short term, taking steps to enforce a costs order against a now seemingly struggling ex-player, is not a step in this direction.

La Trobe Business School was recently named the only PRME (UN Principles for Responsible Management Education) Champion in Australia for 2016 and 2017. The PRME is the first organised relationship between the United Nations and management-related academic institutions, business schools, and universities. In being named an official PRME Champion, La Trobe Business School is illustrating its commitment to working with Global Compact LEAD Companies and to advancing corporate sustainability and social responsibility.
As a PRME champion, La Trobe Business School is one of a select group of Business Schools across the world taking a leadership role in this space. The full list of PRME Champions for 2016-2017 is listed below:

This morning, Head of La Trobe Business School Professor Paul Mather appeared on ABC Radio 774, speaking about his research on female representation at the top levels of Business. In the segment, Professor Mather explains how his team examined 300 top ASX-listed companies, looking into correlations between factors like financial performance and having female non-executives on corporate boards.

Professor Paul Mather’s view is clear: “It’s not just about equity and social justice, it makes economic sense to have women on boards.”

In December this year, La Trobe Business School Associate Professor Dr Kok-Leong Ong, will chair the Australasian Data Mining Conference in Canberra. For Dr Ong, raising awareness around big data and how to handle it correctly, is crucial.

“The theme of this year’s conference is Big Data, Big Data mining, and teaching.” He explains. “All these aspects are important sides of this coin. No matter what industry you’re in, once big data comes streaming in, in whatever form, you will have be equipped to deal with the three big V’s: Volume, Velocity and Variety.”

When dealing with big data, raw data arrives at a rapid rate (velocity), and in huge amounts (a high volume). It also manifests itself in different forms (variety) that the analyst has to be able to process seamlessly. The process of handling and researching this data is data mining. To do this competently, having a highly versatile and analytical skillset is hugely important. “Having access to certain data derived from users or consumers, can give a company a big competitive advantage.” Dr Ong argues. “It gives a business an invaluable insight in the way their product is rated, consumed and rated in the world depending on what is being marketed exactly. But the shape, form and way of processing raw data will depend entirely on the business, and what variables they are keen to know more about.”

When talking about ‘competitive advantages’, the focus is often on financial advantages for big corporations. However, Dr Kok-Leong Ong believes that competitive advantage is broader than this: “A lot of big data can be used for social good in society as well, but an important factor in achieving this social good, is making sure data analysts are trained in such a way that they not only master the skillset required, but are also aware of the ethical value of the data they’re handling, and asking questions about how this data will be implemented in a company’s business plan. Ask yourself where this data can go, and what could be achieved with it if it reaches the right people.”

In Dr Kok-Leong Ong’s eyes, creating this sense of responsibility in graduates, means instilling it in students at university through teaching. “At La Trobe Business School, we offer subjects delving into the ethical side of handling data, in combination with subjects detailing Business-oriented abilities relating to areas including Finance, Management and Marketing, so students develop a broader sense of entrepreneurship in combination with their analytical skills.”

This is why fears of a draconian surveillance society running on big data often seem unfounded to him. “If we train people correctly and encourage them to do good, big data can create enormous benefits for society.” Dr Ong explains. “For example, one of the projects I’m currently working on revolves around mothers using formula to feed their newborn babies, and whether there is any correlation with whether or not the child develops an allergy or is prone to obesity at a later stage. We are currently capturing usage data from a group of young mothers, to determine in what way the information they come across on a La Trobe developed app has an effect on their baby’s health. If an app encourages a parent to add the right amount of water before the powder for example, the parent will statistically be more inclined to add a bit too much water to the portion every time. In one feed, this might not mean much, but when you are overfeeding a child six times a day, this will very likely have consequences in the long run. If we can develop our research in such a way that it will prevent this in the future, it can have a huge impact on a large amount of people, for generations to come.”

Dr Kok-Leong Ong will be chairing the Australasian Data Mining Conference in December this year. For more information on the conference, see the conference website.